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Why do insurers continually focus their operational improvements on expense reductions, when there is arguably more savings potential on the loss side? The author contends that most insurers look first for savings in the expense ratio because they consider losses "out of their control." Controlling the function of underwriting is fast becoming a lost art.
This article describes five key tactics that make up a comprehensive underwriting improvement strategy, including providing useful and accessible reference material, leveraging the knowledge of experts, identifying expert competency, providing competency training, and establishing underwriting tracking systems.
The results are in: After a year of downsizing and cost-control efforts, a major property/casualty carrier announces in its report to stakeholders that it has shaved three percentage points off its expense ratio-a savings of about $60 million. That is no small feat considering that the expense ratio has hovered at around 30 percent for most of the last decade. But what if the insurer could squeeze the same percentage of savings from its loss ratio? For this company, a hypothetical example with a combined ratio of about 120, that savings would amount to $180 million-three times as much.
So why do so many companies continually focus their operational improvements on expense reduction? Because most consider losses as a part of the business that is generally out of their control and perhaps that the controlling function of underwriting is fast becoming a lost art.
For years, poor underwriting has been somewhat hidden by virtue of the almost automatic rate increases served on behalf of the industry by ratemaking organizations. If the experience for a particular class of business for a given territory went bad, it sparked a rate increase. But companies with poor underwriting quality are finding they can no longer count on this false security. To paraphrase investment sage Warren Buffet, whose Berkshire Hathaway reinsurance unit is a major player in catastrophe coverage, "the tide has gone out and we can see who has been swimming naked" (Berkshire Hathaway Annual Report, 1992).
When an insurance company "re-engineers" its business processes, managers usually look at inputs (submissions) and outputs (policy issue, customer service, claims) but they often do not consider what happens in between. In most of the new...